This week, the Service Employees International Union (SEIU) filed a petition with the Federal Trade Commission (FTC) asking it to investigate what it calls “abusive practices” in the franchise industry. The union claims that large franchisors have, among other things, failed to disclose pertinent financial information to franchisees. As many people know, franchisors do disclose some financial information in the Franchise Disclosure Document (FDD).
While the majority of items in the FDD pertain to the franchisor, there are two items that contain information pertaining to franchised locations. One of them is item 19, “Earnings Claims.” It is an optional disclosure. The other is item 20, which provides the names and contact information of franchisees. Item 20 is not optional, however the references have no legal duty to disclose the performance statistics of their business.
Another key component to the FDD is the section on litigation history. A number of claims against the franchisor may be a sign that it hasn’t performed according to its agreements. It could also be a sign that franchisees have not been satisfied with its performance.
One could argue that all of these items in an FDD are warning indicators for a prospective franchise buyer. But remember, nothing in a franchise disclosure document replaces research of a prospective buyer. It is the buyer’s responsibility to do his or her due diligence before entering into an agreement with a franchisor. If that buyer and the franchisor both take proper precautions, including hiring a competent lawyer – then both parties have a much better chance at making sure the legal requirements actually serve their purpose of protecting or safeguarding interests.